W-2 or 1099 for your first clinician?
When practice owners ask whether to hire their first clinician as a W-2 employee or a 1099 contractor, they often start with cost.
A contractor may seem cheaper. You avoid W-2 payroll and employer payroll taxes. But classification isn’t a preference or a budgeting choice. The law looks at how the work is actually done, not just what the contract calls it.
What the IRS looks at
For federal tax purposes, the IRS groups the evidence into three categories: behavioral control, financial control, and the relationship between the parties. No single contract label decides the answer. The IRS looks at the facts of the working relationship. IRS guidance
Consider the arrangement many practice owners picture for a first hire. The clinician uses your EHR and documentation standards. They see clients referred by your practice, work under your practice name, attend regular consultation, and use a fee you set.
Those may be sensible ways to operate a group practice. They can also point toward an employment relationship, especially when you train the clinician or direct how the work is done. The details matter.
If a business misclassifies an employee as a contractor, the IRS says it may be liable for employment taxes. That’s one reason to decide classification before you make an offer, not after the working arrangement is already in place.
New Jersey uses the ABC test
New Jersey uses the ABC test under its unemployment, wage and hour, and wage payment laws. To classify a worker as an independent contractor under those laws, the business must establish all three parts:
A: The worker is free from the business’s control or direction, both under the contract and in practice.
B: The work is outside the usual course of the business, or it is performed outside all of the business’s places of business.
C: The worker has an independently established trade, occupation, profession, or business.
The business has the burden of proving all three. If it cannot establish even one, the worker is treated as an employee under the test. New Jersey’s rules explaining how the test applies became operative on October 1, 2026. NJDOL’s adopted rule
For a therapy practice, prong B deserves a close read. Providing therapy may be part of the practice’s usual course of business. But the rule also addresses where services are performed: a worker’s personal residence where they perform remote work is not considered the employer’s place of business. That may matter to the location side of prong B. It does not establish that a particular clinician is a contractor. The business still has to meet prongs A and C, too.
If you practice outside New Jersey, your state may use a different test. Check the rules that apply where you operate before deciding how to classify a clinician.
When a contractor arrangement may fit
A contractor arrangement may be more plausible when the clinician has an established practice of their own, brings their own clients, and sets their own policies. But those details do not decide classification on their own. The whole working relationship matters, and state tests can differ.
The arrangement I would not assume is safe is one where the clinician functions as part of your team but the contract calls them a contractor. The label cannot replace a review of the actual work.
Why I build first hires as W-2
A W-2 clinician costs more per session because the practice takes on employer payroll costs. I break down that math in What your first clinician really costs.
For my first hire, I want the ability to train the clinician, set practice standards, schedule consultation, and build a shared way of working. Those are part of how I want to run a group practice. I build for that relationship openly, with an employment agreement that spells out what the practice and clinician expect from each other.
Before you post the role
Decide how you plan to classify the role before you write the job post, set the pay structure, draft the agreement, or plan onboarding. Changing course later can take more work than making a careful decision at the start.
If you’re still deciding whether you’re ready to hire, start with the free First Hire Readiness Check. If you’ve decided to hire a W-2 employee, the First Hire Kit includes an employment agreement and confidentiality agreement for your attorney’s review, along with a compensation guide for pricing the W-2 costs into your split.
** This post is educational information, not legal, tax, or accounting advice. Worker classification depends on the facts of the arrangement and the laws that apply. Review your plans with an employment attorney and accountant before hiring.